The stock price of Cloud CRM and software company Salesforce (NYSE: CRM) has been under pressure despite releasing strong results on Monday. While the company’s 4th quarter revenue and earnings numbers were ahead of estimates, the market has chosen to focus on the weaker guidance for the 1st quarter of 2020.
By the Numbers: Strong Growth in Revenue and Billings
Salesforce’s 4th quarter revenue came in at $3.6 billion, up 26% YoY and ahead of the $3.56 billion analysts were looking for. Non-GAAP EPS were $0.70 versus the $0.55 expected – though it is important to note that without a large tax adjustment earnings may have been below consensus.
Quarterly billings of $6.79 billion were also strong, rising 22% and well ahead of the $6.43 billion expected by analysts. Revenue from the largest segment, Sales Cloud Segment, was disappointing and only grew 11%. However, the Service Cloud and the Marketing and Commerce Cloud Segments both grew 22%, and the Salesforce Platform and Other Segment grew 54%. This last segment benefited from the newly acquired MuleSoft, and now contributes 23% of all revenue.
While top-line growth was inconsistent across segments, the share of revenue is now in a more diversified position.
2019 Guidance — Not all Positive News for Investors
Operating expenses grew 32%, highlighting one of the risks to Salesforce and several other growth companies in the tech sector — namely growth comes at a cost.
Near-term guidance was slightly lower than analysts were hoping, while full-year guidance was in line. The company’s management said they expect 1st quarter revenue of $3.67 billion to $3.68 billion versus the consensus of $3.69 billion and EPS of $0.60 to $0.61 versus the consensus of $0.63.
For the full 2020 year, the company expects revenue of $15.95 billion to $16.05 billion vs. estimates of $15.97 billion, and EPS of $2.74 to $2.76 versus the $2.75 Wall Street has been looking for.
The stock price, which was already down 3.66% lower on Monday before the results were released, fell a further 2.7% in after-hours trading after the results were released. On Tuesday the stock price was still lower, but up slightly from Monday’s late trade lows.
Is Salesforce’s Stock Price Justified?
Clearly, the market was looking for more when the stock price hit a new all-time high on Friday. Both the stock price and earnings have shown incredible growth since 2009 when Salesforce was trading at $6.
Today the company is massive with a market cap of over $120 billion and over 30,000 employees. At this stage, questions about the substantiality of its growth trajectory are to be expected.
However, the company is well positioned to support the companies and parts of the global economy that are thriving. While it is geared to the global economy, its focus is on sectors that should continue to outperform. The trailing PE is still well over 100, but that’s actually historically low for the company. Between 2006 and 2017, for quarters with positive earnings, the price multiple ranged between 200 and 900.
So, despite trading close to all-time highs, Salesforce is probably not overvalued, but it’s certainly not cheap. In addition, on such a high price multiple it would be exposed to a downturn in the economy, and that’s possibly why management is being cautious with guidance.
Salesforce is a great company to own for the long term but could be a risky bet in the short to medium term. With that said, further short-term price weakness is likely to attract bargain hunters and there may be a trading opportunity over the next few days.